CANADIAN GROWTH EQUITY STRATEGY – Q2 PORTFOLIO COMMENTARY
Pembroke’s Canadian equity portfolios experienced a strong rally in the second quarter of 2020, rebounding from an extremely challenging start to the year. While the COVID-19 pandemic remains incredibly disruptive to lives and businesses on a global scale, actions taken by monetary and fiscal authorities to counter the economic fallout from containment measures appear to have comforted investors. Significant uncertainty remains as to the ultimate severity and duration of the outbreak, but market participants are looking through near-term disruptions.
While strong absolute equity market returns in the second quarter of 2020 were broadly based, Pembroke’s Canadian equity mandates performed well on a relative basis too, outpacing both the S&P/TSX Composite and Completion Indices. From an industry group perspective, investments in the technology, consumer discretionary, industrial, and financial sectors were the largest contributors to the gains experienced during the quarter.
Two stocks made significant positive contributions to returns in the second quarter.
Two stocks made significant positive contributions to returns in the second quarter.
Shares in Kinaxis (“KXS”), a cloud-based provider of supply chain planning software, surged in the second quarter of 2020 as the company reported strong financial results. Moreover, management indicated that demand for its core offering, RapidResponse, is accelerating as organizations are relying on the company’s concurrent planning solutions to navigate disruptions caused by COVID-19. Drawing on its strong balance sheet, the company made two acquisitions in order to enhance their artificial intelligence forecasting abilities, increase supply chain resiliency, and further penetrate into new and existing verticals. With its market leadership, strong financial position, and management’s ability to strike a balance between growth and profitability, Kinaxis is positioned to remain a long-term structural winner in Canada.
Shares in BRP (“DOO”), a manufacturer, distributor, and marketer of recreational powersport and marine products worldwide, rebounded sharply in the second quarter. After shutting down its factories for two months due to COVID-19-related governmental restrictions, BRP is now struggling to keep up with strong retail demand for its line of side-by-side vehicles, ATVs and marine products. Confined at home, consumers are reallocating their vacation and leisure budgets to “COVID-compliant” alternatives such as powersports in a scenario analogous to that which occurred following 9/11. As a result, many of BRP’s products are out of stock at dealers. Responding to demand and replenishing dealer inventory levels may carry BRP’s sales well into 2021 and support earnings despite the economic recession and the discretionary aspect of their products.
Two stocks made significant negative contributions to returns in the second quarter.
Shares in Evertz Technologies (“ET”), a global provider of broadcast equipment and solutions that deliver content to televisions, on-demand services, streaming services, and mobile devices, declined in the second quarter as COVID-19 travel restrictions impaired the company’s ability to complete installations of its systems as originally scheduled. Furthermore, the cancellation of live sporting and entertainment events negatively impacted near-term demand for Evertz’ systems. While the company has a debt-free balance sheet, management chose to cut the dividend in order to preserve financial flexibility and free up capital for potential acquisition opportunities. In the longer-term, COVID-19 should spur increased demand for efficiently broadcast content; Evertz remains well positioned to capitalize on this trend.
Shares in Currency Exchange International (“CXI”), an operator of 45 retail foreign exchange locations and a provider of comprehensive foreign exchange and payment services to business customers, were weak in the second quarter. Uncertainty as to the timeline for the resumption of global tourist travel weighed on the outlook for the company’s retail foreign exchange operations, overshadowing progress in the company’s business-to-business segment. Still, the company remains well capitalized to weather COVID-19 related disruptions, particularly relative to smaller competitors.
Pembroke Dividend Fund Commentary
The Pembroke Dividend Growth Fund posted strong gains in the second quarter of 2020, rebounding from a difficult first quarter that was marred by COVID-19 driven disruptions and uncertainty. While visibility regarding the path to economic recovery remains limited, global actions taken by monetary and fiscal authorities have proven sufficiently decisive to persuade equity market investors to re-embrace risk.
On a relative performance basis, the fund outperformed both the S&P/TSX Composite Index and the S&P/TSX Dividend Aristocrats Index during the quarter. While the fund trailed the higher beta S&P/TSX Completion and Small Cap indices in the second quarter, it remains comfortably ahead of both those indices on a year-to-date basis.
Industry group performance reflected the broad-based nature of the second quarter rally, with only the fund’s communications holdings in negative territory for the period. Investments in the technology, consumer discretionary, industrial, and financial sectors were the largest contributors to gains during the quarter.
Two stocks made significant positive contributors to performance in the second quarter of 2020.
Shares of Collectors Universe (“CLCT”), a leading provider of third-party authentication and grading services for high-value collectibles such as coins and trading cards, rallied in the second quarter to new all-time highs. While the company experienced disruptions in March and April due to shelter-in-place orders in effect in California, the company was met with unprecedented demand upon resuming operations as COVID-19 isolation measures led to a resurgence in interest in hobbyist collecting. Additionally, an activist investor announced a significant position in the company in June and is encouraging the board of directors to take actions to enhance the company’s place in the transactional portion of the industry. This had the effect of further piquing interest in the Collectors Universe story.
Shares in Richards Packaging (“RPI.UN”), a distributor of plastic and glass containers to small and medium sized businesses and a distributor of healthcare packaging and dispensing systems to pharmacies, performed well in the second quarter. The company has been the beneficiary of a surge in demand for sanitizer and disinfectant products, as well as the pumps, sprays, and nozzles used to dispense them. We believe it is likely that demand will remain elevated compared to pre-pandemic levels as more stringent sanitization and disinfection protocols become the norm in a post-COVID-19 world. Moreover, the company bolstered its growth profile with the sizable acquisition of a complementary business in the healthcare distribution space.
Two stocks made significant negative contributors to performance in the second quarter of 2020.
Shares in Evertz Technologies (“ET”), a leading provider of content delivery systems servicing the broadcast television, on-demand television, streaming, and mobile markets, were weak in the second quarter. COVID-19 containment measures prevented the company from completing customer installations in a timely matter. Additionally, the company’s short-term outlook was negatively impacted by the cancellation of live sports, entertainment, and political events, which contribute to revenues on an episodic basis. While the board of directors scaled back the company’s dividend policy out of conservatism and to preserve capital for potential acquisition opportunities, we believe that longer-term prospects remain attractive for Evertz as COVID-19 should ultimately drive increased demand for efficient and cost-effective content delivery solutions.
Shares in Cogeco Inc. (“CGO”), a cable service provider with a network spanning Ontario, Québec, and the east coast of the United States, declined in the second quarter as a result of fallout from the COVID-19 pandemic. While the company’s cable assets are seeing reasonable stability in a difficult environment, the company owns twenty-two radio stations whose advertising revenues have shrunk as retail customers slash their marketing budgets amidst store closures. Despite near-term headwinds, Cogeco remains well-financed and its dividend payout ratio is conservative.
LEARN MORE:
- See Our Products page for Pembroke’s range of funds.
- Learn about Pembroke’s Investment Philosophy.
- You can also Meet the Team here at Pembroke.
Other Articles Of Interest
Disclaimer
This report is for the purpose of providing some insight into Pembroke and the Pembroke funds. Past performance is not indicative of future returns. Any securities listed herein, are for informational purposes only and are not intended and should not be construed as investment advice nor is it a recommendation to buy or sell any particular security. Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Pembroke seeks to ensure that the content of this document is correct and up to date but does not guarantee that the content is accurate and complete and does not assume any responsibility for this. Pembroke is not responsible for decisions or actions taken or made on the basis of information contained in this document.
